Binary options trading is a type of investment where the investor forecasts that on a certain date, an asset will have a certain price.

If the investor’s prediction is correct, he receives a fixed amount from the other party. Otherwise, he will get none. Even with the risks being lower compared to traditional options trading, investors should ensure that they thoroughly assess the deal before deciding whether or not the risks are worth taking.

When engaging in binary options trading, the most important element involved is the condition of the option. The terms are not the same as other popular types of financial trading.

Investors must also see if the option comes in American or European style. Whatever the terms, there is no restriction to particular markets in terms of styles. The European style (the more popular style) dictates that the price must be higher or lower than the agreed level on the agreed date. The American style option has a greater chance of giving a payout and this is usually seen in the pricing.

As with any form of option, investors who use binary options trading should provide answers to two questions. First, what are the chances that there will be a payout? Second, how does the pricing of the option show this possibility? It’s important to bear in mind that pricing is not all about the amount the investor pays initially; instead, it is the balance between the amount paid to have the option, and the amount to be received when the option pays out. This scenario is similar to fixed odds in gambling.

It must also be checked if a binary options trading transaction is for cash, or if it is for assets. With an asset transaction, payout will come as a fixed asset (for example, a certain number of shares). In European style, the investor could end up making more money than expected, but this depends on how much the excess is on the designated level on the designated date. This possibility should be considered when deciding whether or not an option makes sense.

Several investors use a formula when they determine an option’s value. While the formula itself is objective, choosing it is, of course, subjective. Probably the most popular of all is the Black Scholes Model. There are variations here, depending on whether the option is based on cash or based on asset, and if it’s a put or a call.

In any case, issues taken into account by the formula are payout level, current stock price, how long until the agreed date, and the volatility of the price of the asset. Also considered in the formula is the current interest rate for risk-free investments like government bonds.